U.S. high-yield defaults fall to 2.4% pace in first quarter, Fitch says

New York, April 7 - The U.S. high-yield defaults fell to a 2.4% annualized rate in the first quarter, according to Fitch Ratings.

That means the market is on track for the lowest annual figure in four years and possibly longer, the rating agency added.

For the first three months 14 issuers defaulted on just under $4 billion of debt, for a year-to-date default rate of 0.6%, Fitch said.

The 2.4% annualized rate is the lowest since 1998.

By comparison, 2003 saw an average of 25 defaults per quarter and 2002 saw 41.

For the 12 months ending March, the default rate was 4.6%.

Fitch observed that high-yield companies continued to find a highly welcoming funding environment in the early part of the year.

About 18% of issuance was rated CCC or lower, nearly matching the proportion among outstanding bonds.

"While the aggressive rating mix of the newly minted bonds might appear troubling on the surface it is important to note that the opportunity to refinance/restructure debt has in fact depressed default rates for these high risk issuers and has bought these companies critical time in anticipation of the economic bounce currently underway," Fitch said in a news release.

Recovery rates continued to rise, the rating agency said.

For the first quarter, the weighted average recovery rate was 53% of par, compared with 44% of par for 2003 defaults and 22% for 2002 defaults. Fitch used the trading price of defaulted bonds one month after default as a measure of recovery value.

Fitch's default index is based on the U.S., dollar denominated, non-convertible, speculative-grade bond market (equivalent of BB+ and below, rated by Fitch or one of the two other major rating agencies). Fitch includes rated and non-rated, public bonds and private placements with Rule 144A registration rights. Defaults include missed coupon or principal payments, bankruptcy or distressed exchanges. Default rates are calculated by dividing the volume of defaulted debt by the average principal volume outstanding for the period under observation.

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